Bennett v. Propp

Supreme Court of Delaware · 1962 · Corporations

187 A.2d 405 (1962)

Updated August 22, 2026

Corporationscorporate repurchasedirector fiduciary dutycontrol contestsuse of corporate fundsratificationbusiness judgmentemergency

Facts

After Textron's principal executive, Royal Little, sent Sadacca a confidential letter stating he intended to seek to buy just over 50% of Noma's stock on a first-come, first-served basis, Sadacca did not inform the board and instead caused the purchase of 199,100 shares of Noma stock in two trading days without board authorization. The purchases raised the market price and required about $2.3 million, which Noma was not financially positioned to pay from current assets. At a special board meeting on the Saturday before payment was due Monday, most directors learned of the purchases for the first time and voted, with Sadacca abstaining, to approve and ratify his action while arranging financing. The suit alleged that the purchase and related financing wasted corporate assets by using corporate funds to preserve management control.

Issue

May directors or officers use corporate funds to purchase the corporation's own shares in order to preserve existing management control? If such purchases were unauthorized and illegal when made, can a later board ratification relieve the purchasing officer of liability, and are directors who approve payment in a sudden emergency personally liable as well?

Rule

Use of corporate funds to purchase shares primarily to preserve the control of incumbent management is improper, and directors bear the burden of justifying such a purchase as one primarily in the corporate interest when a threat to control is involved. A later board resolution cannot ratify or legalize an originally unlawful control-motivated purchase, though the board may authorize taking up and paying for the stock to protect the corporation from immediate financial difficulty. Directors who first learn of the matter in an immediate emergency may be protected for choosing payment in the exercise of business judgment, but a director with prior knowledge who remains silent and later approves the transaction may be jointly liable with the wrongdoer.

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One of 10 multiple-choice questions for this case. Pick an answer to see why.

Cedar Vale Tools, a Delaware corporation based in Cleveland, learns that an investor from Phoenix has been buying shares and criticizing management. Without board approval, chair Daniel Mercer causes the company to buy a large block of its own stock on the market after telling the broker he wants to keep the current board in place. The company later argues the investor might someday redirect operations in ways management dislikes, but no board meeting had been held and no specific harmful plan had been identified.

If shareholders sue derivatively, which is the strongest analysis of Daniel's liability?

Explanation. The governing rule is that corporate funds may not be used primarily to preserve management control. When a threat to control is involved, those defending the repurchase bear the burden of justifying it as primarily in the corporate interest. A speculative future concern, without a real and immediate threat to corporate welfare or policy and without prior board consideration, is insufficient.